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Insurance

by Alan Henderson

With its risks of drowning, shipwrecks and fires, as well as unsafe workplaces, early colonial New Zealand was fertile ground for insurance companies. The government set up insurance firms to compete with private insurers.


Early life insurance

The need for insurance

Early colonial New Zealand was a country full of risks. A lack of roads and a scattered population meant communication and supplies relied on coastal shipping. Shipwrecks and fires at sea were common and every year a number of vessels were lost. Life on shore was just as hazardous. The mainly wooden-built early colonial towns often caught fire, and since many people worked in mines, mills or other workplaces, accidents and deaths were frequent. In this raw society insurance was valuable, and the insurance industry grew quickly.

Insurance involves paying premiums in return for protection against the cost of specified risks or the provision of financial benefits in certain circumstances. The contract between the insured person or organisation and an insurance company is known as a policy. Some policies also protect the insured against liability to others (third parties).

There are two main types of insurance business:

  • General insurance began with marine and fire insurance and now includes insurance against loss or damage to all types of property, motor vehicles, aircraft, and goods in transit or storage. General insurance also offers protection from loss of profits, and includes travel and health insurance.
  • Life insurance now includes cover for personal injury and sickness, income replacement (paid when policy holders are unable to earn their usual income), mortgage guarantee (when policy holders are unable to pay their mortgage) and other credit insurance.

Early life insurance companies

The first life insurance companies in New Zealand were mutual companies, meaning they were owned by their policy-holders. Local branches of Australian companies dominated the market. The Australian Mutual Provident Society (AMP) operated in New Zealand from 1854, and others soon followed. The National Mutual Life Association of Australasia (later part of the AXA group), founded in 1869, anticipated trans-Tasman operations in its name but did not open a New Zealand branch until 1880.

These early companies usually sold whole-of-life policies, with the sum assured paid out on the death of the insured person. Later they also sold endowment policies, which paid out during the life of the insured person, usually in a series of regular instalments, to provide for their retirement. By 1900 endowment insurance made up about half the business of most life companies. From the 1890s insurance companies also offered group endowment insurance schemes for employers to make available to their staff.

Fighting for life

 

Selling life insurance in 19th-century New Zealand was fiercely competitive. Colonel George Whitmore, a veteran of the New Zealand wars, found that ‘[a] person can hardly get out of a railway carriage without someone rushing up to him and wanting to “take his life”.’1 Some customers were more valuable than others. Insurance agents were told to charge more to insure ‘Maoris, half-castes, quadroons [quarter-castes], Chinese or other men of colour’. Special conditions also applied to ‘persons connected in any way with the manufacture or sale of intoxicating liquors’.2

 

Government Life Insurance

Not everyone who wanted life insurance could afford the premiums, and the financial stability of the early insurance companies could not be guaranteed. So in 1869 the government set up Government Life Insurance, at first selling its policies through the national network of state-owned post offices. The business grew rapidly and by 1877 Government Life was bigger than the combined total of its competitors. Local branches of British and American companies also appeared now and then, but the New Zealand life insurance market was dominated by Government Life and the Australian mutual companies until the 1980s.

Footnotes
    • Quoted in C. W. Vennell, Tower of strength: a centennial history of the N. Z. Government Life Insurance Office, 1869–1969. Auckland: Wilson and Horton, 1969, p. 32. Back
    • Quoted in Tower of strength , p. 36. Back

Early fire and general insurance

Fire was a constant danger in early New Zealand, since most homes and commercial buildings were built of timber and the first fire services were little more than bucket brigades. In July 1858 a whole block in central Auckland was destroyed by fire. Agents for British fire and general insurance companies appeared in New Zealand by the early 1850s but could not meet the growing demand for coverage against the high risk of fire. This provided an opportunity for local businessmen.

A number of local companies were formed, but only four proved long-lasting. The New Zealand Insurance Company (NZI) was founded in Auckland in 1859 and followed by the Auckland-based South British Fire and Marine Insurance Company, formed in 1872, and Dunedin’s National and Standard companies, registered in 1873 and 1874. Later many British and Australian companies appointed agents or opened branches in New Zealand, and by 1893 a total of 27 companies were represented in the local general insurance market.

General insurance tariffs

General insurance companies cooperated to standardise their premiums (the cost of their policies) on the basis of agreed schedules known as tariffs. The tariff kept the cost of premiums stable and reduced undercutting between companies, making them more profitable and better able to meet the cost of claims. In 1868 the first fire insurance tariff in New Zealand was agreed by seven companies operating in Auckland, and other centres soon followed.

To make sure the companies kept their rates to these tariffs even in times of increasing competition, the Council of Fire Underwriters’ Associations of New Zealand was set up in 1895. All the major fire and general companies in New Zealand belonged to the council. It became the Insurance Council of New Zealand in 1967.

‘That’s not our fire’

 

Many 19th-century insurance companies had their own fire brigades, to fight fires in the buildings they insured. The first duty of a brigade captain called to a fire was to inspect the metal plate on the building that identified the company it was insured with. If it was not his own company, the brigade returned to their fire station.

 

State Fire Insurance

Although the tariffs provided some advantages for customers, they were also seen as keeping premiums unreasonably high. The government responded by setting up the State Fire Insurance Office in 1903. It was the first such company in the British Empire and only the second in the world. The private insurance companies tried to prevent the new company from getting established by denying it the reinsurance that all general insurance companies need to cover their own losses. However State Fire opened for business in January 1905 with premiums 10% below tariff rates. The tariff companies immediately dropped their own rates, but by 1920 State Fire insured more property than any other general insurance company in New Zealand.

In the 1930s other non-tariff companies emerged offering general insurance and these, along with insurance brokers, placed further commercial pressure on the tariff companies. The tariff system had practically collapsed by the 1960s.


Accident insurance

Accident insurance covers a wide range of risks of loss or injury due to an accident. Many of these risks were once insured separately, but since the 1960s they have been incorporated into comprehensive general insurance policies.

The need to insure against accidental injury or death caused to others ended in New Zealand in 1973, when the Accident Compensation Commission (Corporation from 1982) began operating. Other types of professional and public liability insurance remained essential for those – such as doctors, lawyers, accountants and company directors – who were at risk of liability for financial loss caused to others due to their work or professional responsibilities. The main type of accident insurance in 2010 was motor vehicle insurance, including third-party cover against damage to other drivers’ vehicles.

Insure it, just don’t drive it

 

To a South British insurance director in 1913 a car seemed ‘quite a good risk’, but only if it was ‘used for private purposes, and spends a good deal of time in the garage, and has not to stand the congested traffic of town, and is not used for excursions in the country’. 1

 

Vehicle insurance

When motor vehicles became widely available in New Zealand, a new form of accident insurance emerged. Specialist motoring insurers arrived to compete with the existing general insurance companies. One of these, Wairarapa AA Mutual, offered lower rates for vehicle insurance from 1915, and other motor mutuals soon followed. Fierce competition for customers, and the high number of accidents among novice drivers, meant motor-vehicle insurance was usually unprofitable until the 1930s, when premiums stabilised due to a consensus to minimise competitive rate-cutting.

Health insurance

Insuring against injury or illness was one of the most important functions of the early New Zealand-based friendly societies, based on 19th-century English models. In 1938 the Social Security Act provided for means-tested old age pensions and reduced the need for individuals to insure against illness or depend entirely on savings or charity. Although state-funded health care was available to everyone in New Zealand, private medical insurance became available when the Southern Cross Medical Care Society was incorporated in 1962. A number of other life and general companies later entered the health insurance field.

Workplace accident insurance

From 1882, laws first encouraged, then required, employers to provide some insurance cover for employees who were injured or killed at work. Motor vehicle owners faced a similar legal requirement to insure against death or injury to other people (known as third parties) from 1928. Accident insurance was mainly provided by the accident branches of major general insurance companies, but was also offered by a few specialist accident insurers.

However people still faced great difficulties in receiving adequate compensation for death or injury, whether in the workplace or elsewhere, such as from a motor vehicle accident. The recommendations of the 1967 Woodhouse Commission led to the Accident Compensation Act 1972. Under this act people gave up the right to sue for compensation. The Accident Compensation Commission (ACC) was set up to compensate and rehabilitate accident victims through levies on earners, employers and vehicle owners. A 1973 amendment provided a government contribution to cover non-earners such as children and retired people.

In 1999 the ACC’s state monopoly on accident insurance was briefly opened up to competition from commercial insurance companies – but the legislation was repealed after a change of government the following year. That possibility was raised again after the general election of 2008.

Footnotes
    • Quoted in C. W. Vennell, Risks and rewards, a policy of enterprise 1872–1972: a centennial history of the South British Insurance Company. Auckland: Wilson and Horton, 1972, p. 291. Back

Disaster insurance

The massive San Francisco earthquake of 1906 resulted in huge payouts by insurance companies and sent some of them into bankruptcy. Afterwards insurance companies worldwide ruled out shock and fire damage due to earthquakes from their fire insurance policies. As a result, most of the damage caused by the devastating Napier earthquake of 1931 was not covered by insurance. In 1937, with the threat of the Second World War looming, the international insurance industry again took a united stand and refused to accept any risk from war damage.

Too many cooks

 

Sixteen-year-old George Fraser began working as an office boy for a Wellington insurance company in 1931, and was unimpressed by more than 30 general insurance companies operating in the city. ‘[T]he real objective of the “inspectors” was to take business away from each other on the basis of personal connections and name-dropping … Each company had hundreds of sub- or local agents who used their influence and connections to earn those few precious pounds in commission. I felt the whole system was a waste of time and money and that a better and cheaper service could be given by a cooperative or the government.’1

 

Earthquake and war damage

From 1906 general insurance companies in New Zealand had paid levies to maintain fire brigades. Following the Napier earthquake, New Zealand was the first country in the world to propose extending this model to fund disaster restoration. In October 1941 the government instead followed a recent British precedent by establishing a War Damage Commission. By 1944 the enemy threat to New Zealand was receding so the original concept was revived and the Earthquake and War Damage Commission was created.

‘All risks’ property insurance

The scope of the Earthquake and War Damage Commission’s coverage extended to widespread flood and storm damage, volcanic activity, landslips and tsunamis, but only for those with property insurance (who had paid the Commission’s levy on top of their insurance premium). In the 1960s the general insurance industry introduced ‘all risks’ property insurance to fill any gaps in the Commission’s cover.

‘War damage’ was dropped from the commission’s role and title in 1993. By then its potential liabilities for the risks of catastrophe were causing serious concern, and it stopped covering commercial property. For those who could afford the premiums (which reflected the unpredictability of the risks), the general insurance industry took over disaster insurance of commercial property.

Footnotes
    • George Fraser, Both eyes open: a memoir. Dunedin: John McIndoe, 1990, p. 18. Back

Government regulation and control

Life Insurance Companies Act 1873

There has only been very light government regulation directed specifically at the New Zealand general insurance sector. Under the Life Insurance Companies Act 1873 life insurance companies were required to pay the government a deposit of between £5,000 and £10,000 (about $600,000 and $1.2 million in 2009 terms) before they could operate in New Zealand, to prove that they had the necessary funds to pay out on claims. From 1894 overseas accident insurance companies also had to pay this sum. As well, life insurance companies had to declare each year to the government how much money they held in reserve and how much they owed on their policies.

Finding the frauds

 

Fraudulent claims have always been a serious problem for the insurance industry. Many fires were deliberately lit to claim the insurance payout. In 1993 State Insurance established its own investigation unit, eventually staffed by 21 ex-police officers. The unit saved the company more than $5 million each year in false claims. It also contributed towards setting up the Insurance Claims Register, a computer database which matched new claims to earlier ones by the same claimant and greatly helped to identify fraud.

 

Regulating general insurance companies

Fire and general insurance companies were required to have their financial position reviewed annually by the Public Trustee. In 1922 overseas fire and general companies were also required to pay a deposit, and in 1940 New Zealand-based companies had to do the same. The amount of the deposit was not significantly increased until 1974 when it was raised to $500,000. Later the Insurance Companies (Ratings and Investigations) Act 1994 required general insurance companies trading in New Zealand to establish that they were financially stable and to provide this information to potential policy-holders.

Until 1889 fire and marine insurers were not allowed to trade with limited liability. Before then the shareholders were liable for all of their company’s debts. The local fire and marine companies had to have capital of at least £50,000.

Coordinating the life insurance industry

Life insurance business has been more tightly regulated than general insurance. This is because life insurance companies hold many policies, such as endowments and whole-of-life policies, that pay out long into the future, so the long-term sustainability of the company is especially important. To coordinate and represent the life insurance industry, a branch of the Australian Life Offices’ Association was set up in New Zealand in 1918 and became a separate organisation in 1972. It later merged with the Investment Funds Association to form the Investment Savings and Insurance Association of New Zealand in 1997.


Transforming the insurance industry

Nineteenth-century insurance clerks perched on stools at high sloping desks, entering columns of figures into huge hardbound ledgers. Their companies employed teams of insurance agents to roam the countryside by horseback, train and eventually motor car, attempting to sell policies on commission to anyone they met.

Over the 20th century the New Zealand insurance industry was transformed. Commission agents tied to individual companies largely disappeared and insurance brokers and financial advisors grew in influence. The boundary between the two main sectors of the industry blurred in the 1920s, as life and general insurance companies began to compete for workers’ compensation insurance.

In the 1950s life insurance companies began to move into the fire and general insurance market. Insurance companies also invested increasingly large amounts of reserve capital in mortgages, in the first signs of the integrated financial services industry of the present day.

Standing up for insurance

 

The manager of South British Insurance was not impressed by the modern office furniture appearing in 1921. ‘Flat-topped tables look well, but I do not approve of them for counter staff. A good counter clerk, in a busy office, really requires to stand for most of the day ... Chairs have a tendency to make one too comfortable ... Quicker work can be done on ledgers standing at a table than sitting at a table.’1

 

Takeovers and privatisation

The tariff arrangements by which groups of insurance companies agreed to charge the same rates allowed many general insurance companies to operate profitably even in the small New Zealand market. As competition between these companies increased, the smaller ones were taken over by much larger insurance and banking multinationals. Similar competitive pressures caused the decline of the mutual ownership model (by which policy-holders jointly owned their companies) in the life insurance industry.

The economic reforms of the 1980s saw Government Life become a state-owned enterprise, renamed the Tower Corporation. It was then mutualised (owned by policy-holders), then later privatised and eventually listed on the New Zealand and Australian stock exchanges. State Insurance was sold to Norwich Union Holdings in 1990 and in 2003 its operations were combined with its old rival NZI (formerly New Zealand Insurance), then owned by Insurance Australia Group.

More recently, branch offices of insurance companies became fewer and smaller as telephone and internet transactions largely replaced face-to-face customer services. Insurance became simply a branch of the financial services sector, with many banks providing full insurance services.

A $4-billion industry

In 2007–8, the general insurance industry in New Zealand earned a gross income from premiums of over $3 billion, and a net income of $2.6 billion. It paid out claims of $1.74 billion and spent $826 million on staff, commissions and other operating costs. The main business was motor vehicle cover (36%), domestic comprehensive insurance (23%) and commercial property insurance (14%). In the life insurance sector, $1.48 billion was earned from premiums while $837 million was paid out on policies. The wider investment savings sector managed over $60 billion of superannuation, unit trust, life insurance and other funds.

Footnotes
    • Quoted in C. W. Vennell, Risks and rewards, a policy of enterprise 1872–1972: a centennial history of the South British Insurance Company. Auckland: Wilson and Horton, 1972, p. 320. Back

Hononga, rauemi nō waho

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How to cite this page: Alan Henderson, 'Insurance', Te Ara - the Encyclopedia of New Zealand, http://www.TeAra.govt.nz/mi/insurance/print (accessed 23 September 2019)

Story by Alan Henderson, published 11 Mar 2010